Surge in Credit Card Spends: Understanding Key Drivers and Implications

India's evolving financial landscape has transformed credit cards from a luxury to an everyday necessity. The Indian credit card market is experiencing unprecedented growth, with over 100 million cards already issued as of February 2024 and credit card spends crossing US$ 220 billion in FY24. This notable surge in credit card spending has caught the attention of financial analysts, consumers and economists. Displaying larger economic trends, this phenomenon has substantial effects on the personal finance of consumers, the banking sector and the overall economy. Understanding the key drivers behind this rise and its probable impacts is critical for directing the changing financial environment. In this blog, we explore the implications of the significant surge in credit card usage to understand what this means for consumers, financial institutions and India’s economic landscape.

Source: Business Standard

Indian credit card market

India's credit card industry has exceeded 100 million active cards as of February 2024, highlighting significant shifts in the financial habits of Indians. Dominated by HDFC Bank, State Bank of India, ICICI Bank and Axis Bank, the market reported a CAGR of 12% over last four years with number of active cards growing from 57.7 million in FY20 to over 101 million in FY24. This surge is mainly driven by reduced entry barriers and diverse co-branded offerings. Credit cards offer convenience, rewards and credit score benefits. The utility is further enhanced by the Reserve Bank of India (RBI) allowing RuPay credit cards to be linked with UPI.

India's credit card issuers generate revenue primarily from interest income (40-50% of total) from customers carrying balances, with annual rates generally ranging 18-42%. Interchange fees, charged for processing transactions, contribute another 20-25% in total revenue. Additional income comes from various fees, such as annual, over-limit, late payment, cash advances and conversion fees. Despite these advances, credit card penetration in India remains low at under 4%, indicating significant growth potential. However, the rise of UPI, which offers a convenient alternative, presents a challenge. The industry must balance growth with adaptation as consumer preferences and technology evolve, driving financial inclusion and innovation.

Source: Business Standard

Factors leading to the surge in credit card spends in India

• Rewards and loyalty programmes: Credit card holders get several rewards and loyalty programmes, which are a key driver of the growth in the credit card market in India. With a range of offers and cashback benefits, credit card issuers not only attract new customers but also promote usage and build long-term loyalty. For example, airport lounge access, VIP memberships, complimentary movie tickets, dining discount, online shopping vouchers, etc. These programmes enhance the overall value proposition of credit cards, making them an attractive option for a wide range of consumers and contributing to the market's dynamic expansion.
• Digital transformation: Digital transformation plays a vital role in India’s credit card market, resulting in a substantial surge in usage. Established players like HDFC, ICICI and Axis are constantly updating their technology and introducing new features, e.g. digital credit cards and pay later. The introduction of digital platforms, with the help of technology partners, credit card issuers are enhancing areas like customer onboarding, underwriting and card processing, thereby improving customer experiences.
• Emergence of FinTech players in the market: FinTech companies have transformed India’s payment market, making transactions a lot easier. Credit cards can now be issued in no time through mobile apps, which increases card activation rates. Credit lines offered through prepaid instruments have become especially popular among millennials and Gen-Z. These benefits have proven to be valuable payment tools, specifically in segments where the usage was low previously.
• Credit card EMI: Credit card equated monthly instalments (EMI) have enhanced credit card usage in India by allowing expensive purchases to be converted into convenient monthly instalments.
• Emergence of e-commerce: The emergence of e-commerce platforms has been one of the key drivers of the surge in credit card usage in India. Credit cards are becoming a preferred payment method due to multiple discounts and offers provided by e-commerce giants. Companies such as Amazon and Flipkart have transformed online shopping from a trend to a daily habit for many Indians for their essential needs. Digital payment companies like CRED have further contributed to this evolution by adding the option of credit card payment on their platforms, offering mobile wallets, UPI payments and QR-code transactions.

Source: Business Standard

Implications

• Encouraging financial literacy: The growth in credit card usage is significantly improving financial literacy among consumers in rural and urban India. As more people use credit cards, they become aware of credit scores, interest rates and debt management. This increased awareness leads to better financial habits, such as regular monitoring of credit scores, understanding the cost of borrowing and effective debt management. Additionally, credit card usage exposes consumers to various financial concepts and encourages responsible spending and financial planning. Overall, the rise in credit card adoption is fostering a more financially educated and responsible population in India.
• Supporting e-commerce growth: Credit cards are one of the key factors driving the growth in India’s e-commerce market. As per the latest RBI data, credit card spends have grown significantly, reaching US$ 20.41 billion (Rs. 1.7 lakh crore) in January 2024 from US$ 15.61 billion (Rs. 1.3 lakh crore) in January 2023. E-commerce transactions and bill payments contributed over half of these spends, driven mostly by the younger population of the country. Credit card features like EMI and 'buy now, pay later' (BNPL) have also contributed to this growth.
• Behavioural shift in consumer spending: There has been a boost in consumer spending recently as the Indian economy is transitioning from a savings-driven economy to a consumption-driven economy. High discounts, rewards like cashbacks and credit points, and options such as EMI and BNPL encourage higher spending, especially on online shopping platforms like Amazon and Flipkart. Instant issuance of virtual cards via mobile apps has also increased activation rates. As per the recent RBI data, the credit card usage in India posted 27% YoY growth in FY24, reaching US$ 219.21 billion (Rs. 18.26 lakh crore) from nearly US$ 168.07 billion (Rs. 14 lakh crore) in FY23. In March 2024 alone, transactions rose by 10.07% YoY to US$ 19.69 billion (Rs. 1.64 lakh crore), mainly driven by the end of the financial year spending and festival sales. Point-of-sale (PoS) transactions grew to US$ 7.25 billion (Rs. 60,378 crore) in March 2024 from US$ 6.53 (Rs. 54,431.48 crore) in February.
• Debt burden: The surge in credit card spending in India presents a challenge of increasing debt burden among consumers. With easy access to credit, driven by growing consumerism and digital payment incentives, consumers tend to overspend, leading to accruing high-interest debt. This situation can lead individuals into cycles of debt, affecting their financial well-being and credit scores. To protect consumers, the RBI has changed rules for credit and debit cards to tackle the rising default risk. The recent RBI measures make it mandatory for card issuers to track money usage effectively, starting from March 7, 2024. This is a positive step towards encouraging responsible spending and reducing default risks.

Conclusion

Surpassing 100 million active cards, India's credit card industry reflects significant shifts in financial habits and market opportunities, led by major banks such as HDFC, SBI, ICICI and Axis. The dramatic rise from 62 million cards in 2021 to over 100 million today highlights reduced entry barriers and diverse co-branded offerings. Credit cards now offer increased convenience, rewards, benefits and credit score enhancement, with the RBI's decision to link RuPay credit cards to UPI further boosting adoption and providing additional transaction options for users. The future of the Indian credit card market looks bright with increasing users, driven by improving financial literacy and growing digital infrastructure. However, liable usage and financial education are crucial for continuous growth in the industry, with banks and regulatory bodies like the RBI playing a key role in safeguarding consumers, spreading awareness and preventing the misuse of credit cards.